This appeal raises, for the first time in your Lordships' House, a question on the scope of the remedy which Part XVII (sections 459-461) of the Companies Act 1985 provides for a member of a company, typically holding a minority of the shares, who considers that the company's affairs are being conducted in a manner unfairly prejudicial to his interests.

"A member of a company may apply to the court by petition for an order under this Part on the ground that the company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself) or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial."

Section 461(1) provides that if the court is satisfied that a petition under Part XVII is well founded, it may make "such order as it thinks fit for giving relief in respect of the matters complained of." Without prejudice to the generality of this jurisdiction, the court may make all or any of a number of orders specified in subsection (2). These include orders regulating the future conduct of the company's affairs, requiring the company to do or refrain from doing some act and, the remedy most commonly sought, an order under section 461(2)(d) providing for the purchase of the petitioner's shares by other members of the company or the company itself.

2. The facts

The issue in this appeal is whether the company's affairs were conducted in a manner "unfairly prejudicial" to the petitioner's interests within the meaning of section 459(1). Since on any view this must depend upon the particular facts of the case, I must start with a summary of the findings of Judge Paul Baker Q.C., who heard the petition.

Pectel Ltd. ("the company") operates in the construction industry, providing specialist services for stripping asbestos from buildings. In 1983 it employed the petitioner Mr. O'Neill as a manual worker. The respondent to the petition and appellant before your Lordships is Mr. Phillips, an accountant. In 1983, having bought out another shareholder, he held the entire issued share capital of 100 £1 shares. Mr. Phillips was impressed by Mr. O'Neill's energy and ability and advanced him rapidly to foreman, site supervisor and contracts manager. In January 1985 Mr. Phillips gave Mr. O'Neill 25 shares and appointed him a director. In May of that year they had an informal discussion at which Mr. Phillips expressed the hope that Mr. O'Neill would be able to take over fully the day-to-day running of the company. He also indicated that on that basis he would allow him to draw 50 per cent. of the company's profits.

Mr. O'Neill did take over the running of the business and on 30 December 1985 Mr. Phillips retired from the board, leaving Mr. O'Neill as sole director. Although not so described, he was in effect managing director. During the construction boom of the late 1980s, the company prospered. Mr. O'Neill was credited with half the profits, some of which he drew in the form of salary and dividends and some of which he left in the company. When a dividend was declared, Mr. Phillips would waive a third of his 75 per cent. entitlement in favour of Mr. O'Neill to produce equality. In 1988 £49,900 of retained profits, which partly represented Mr. O'Neill's undrawn entitlement, was capitalised by the issue of bonus shares to increase the company's issued share capital to £50,000. They were allotted in the same proportions as their existing holdings. In September 1990 another £50,000 was capitalised in the same way, except that this time non-voting shares were issued. Mr. O'Neill also guaranteed the company's bank account and he and his wife mortgaged their house in support of the guarantee. So that by 1990 Mr. O'Neill had put some of his own earnings into the capital of the company and was potentially liable to contribute more under the guarantee.

For two years, between the beginning of 1989 and the end of 1990, there were discussions with a view to Mr. O'Neill obtaining
a 50 per cent. shareholding. Solicitors, counsel and the company's accountants were consulted. Draft documents were prepared. By October 1990 negotiations had reached a point at which Mr. Phillips indicated that in principle he was willing to increase Mr. O'Neill's shareholding to 50 per cent. when the company's net asset value reached ú500,000 and his voting rights to 50 per cent. when it reached ú1,000,000. These figures were referred to as the targets. It was contemplated that a formal agreement would be drafted to embody these terms and any others which might be found desirable. But this did not happen. At that point, the negotiations stopped. The judge found that there was never any concluded agreement for the allocation of more shares to Mr. O'Neill.

1989-90 was the last good year before the construction boom came to an end. The retained profits were £158,759. The company extended its business to Germany. In 1991, however, the industry went into recession and the company was struggling. Mr. Phillips became alarmed about its financial position and concerned about Mr. O'Neill's management. At the beginning of August 1991 he decided, as controlling shareholder, to resume personal command. He gave Mr. O'Neill the option of managing, under him, the U.K. or the German branches of the business. Mr. O'Neill chose to go to Germany. Mr. Phillips became in effect managing director and assumed that title in November. Mr. O'Neill remained on the board as an ordinary director.

It is clear that Mr. Phillips was not as impressed with Mr. O'Neill's energy and commitment when times were bad as he had been when they were good. He was critical of his conduct of the German side of the business and matters came to a head at an acrimonious meeting on 4 November 1991. Mr. Phillips, as he himself put it in his evidence, "ranted and raved." He made his criticisms forcibly and pungently. He also told Mr. O'Neill that as he was no longer acting as managing director he would no longer receive 50 per cent. of the profits. He would be paid only his salary and any dividends payable upon his 25 per cent. holding. Mr. O'Neill made no comment. The meeting came to an end and he went back to his work in Germany.

Mr. Phillips heard no more on the subject from Mr. O'Neill until he received a letter dated 17 December 1991, which Mr. O'Neill had written after consultation with his sister, who is a solicitor. In the meanwhile, however, Mr. O'Neill had prepared to sever his links with the company. He gave notice to terminate his guarantee of the bank account, which was at the time in credit. He made arrangements with two other employees to set up a competing business in Germany. They negotiated for financial support from a bank. There was nothing wrong in this: Mr. O'Neill had not entered into any covenant with the company not to compete after he left its employment.

The letter of 17 December 1991 was in effect a letter before action. It said that Mr. Phillips had broken his promises to pay Mr. O'Neill 50 per cent. of the profits and to allot him (subject to reaching the targets) 50 per cent. of the shares. He had thereby reduced his position to that of an employee. He also made a number of allegations of financial abuse, amounting to dishonesty, on the part of Mr. Phillips and ended by saying that he had "no alternative but to seek legal advice and instigate the dissolution of our partnership." On 22 January 1992, without further correspondence, Mr. O'Neill issued a petition under section 459. He also issued a writ claiming damages for anticipatory breach of an alleged oral agreement to allot him more shares when the targets had been reached.

3. The petition.

The petition, like the letter of 17 December 1991, contained a number of allegations of financial impropriety on the part of Mr. Phillips. But these were abandoned at the hearing. Both shareholders gave evidence. The judge found that he much preferred the evidence of Mr. Phillips, which he said was careful and straightforward, to that of Mr. O'Neill, who was on some matters unsatisfactory and prevaricating. He was, the judge said, "inclined to see base motives in everything that Mr. Phillips did."

In the end, therefore, the allegations of unfairly prejudicial conduct came down to two complaints. The first was Mr. Phillips's termination of equal profit-sharing and the second was his repudiation of the alleged agreement for the allotment of more shares. The judge rejected these and dismissed the petition on two grounds. One was that it fails on the facts. Mr. Phillips had not committed himself permanently and unconditionally to an equal sharing of profits. Mr. Neill's expectation was to receive 50 per cent. while he acted as managing director. But if circumstances changed, Mr. Phillips was entitled as controlling shareholder to redraw his responsibilities and remuneration. He had made no commitment which made it unfair for him to exercise this power. Likewise in the case of the additional shares. The matter had never gone beyond negotiation and Mr. Phillips had made no promises. It was therefore not unfair for him to retain his majority holding. For the same reason, the judge dismissed the claim to damages in the writ action but made by consent an order for an account of undrawn profits. An appeal against the judgment in the writ action was not pursued.

The judge's second ground for dismissing the petition was that the prejudice to Mr. O'Neill's interests from the reduction in his profit-share and refusal to give him more shares was not suffered in his capacity as a shareholder, as a member of the company. The profit-share was his remuneration for acting as managing director and the additional shares were likewise a reward and incentive for working for the company. They did not derive from his previously having had a 25 per cent. shareholding. On the contrary, that too had been a reward for his services as an employee. Mr. O'Neill's membership of the company was therefore irrelevant to the expectations which he claimed it would be unfair to deny. They would have been exactly the same if he had not previously held any shares at all.

4. The Court of Appeal

The Court of Appeal (Nourse, Potter and Mummery L.JJ) allowed the appeal and ordered Mr. Phillips to buy Mr. O'Neill's shares. Nourse L.J. gave the judgment. He said that although there was no concluded agreement about giving him more shares, he had a "legitimate expectation" that he would receive them when the targets were reached. Likewise, he had a legitimate expectation of receiving 50 per cent. of the profits. It was therefore unfairly prejudicial of Mr. Phillips to deny these expectations without giving Mr. O'Neill "notice and an opportunity to defend himself" or offering to buy his shares at a fair value. The Court of Appeal made the important additional finding that Mr. O'Neill had been in effect "forced out of the company." In view of the denial of his legitimate expectations, he could no longer be expected to remain with the company and "was bound to engage himself elsewhere."

Nourse L.J. also rejected the judge's second reason. One took, he said, a broad view of the interests of a member. They were not necessarily limited to his strict legal rights. So, for example, a member who had subscribed for shares on the understanding that he would take part in the management of the company might have an interest as member in his continuing participation, though this was not a right attached to his shares under the articles of the company. Nourse L.J. considered that there was no other relevant capacity in which the unfair prejudice of which Mr. O'Neill complained could have been suffered. He did not expressly deal with the possibility that it might have been as an employee. It must of course be borne in mind that whereas the judge was considering only the prejudice arising from the termination of the profit-sharing and share allocation arrangements, the Court of Appeal was taking a more global view and treating them as part of conduct by which Mr. O'Neill was deprived of all participation in the affairs of the company by a kind of constructive expulsion.

5. "Unfairly prejudicial"

In section 459 Parliament has chosen fairness as the ˇKˇˇKcriterion by which the court must decide whether it has jurisdiction to grant relief. It is clear from the legislative history (which I discussed in In re Saul D. Harrison & Sons Plc. [1995] 1 B.C.L.C. 14, 17-20) that it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable. But this does not mean that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles. As Warner J. said in In re J. E. Cade & Son Ltd. [1992] B.C.L.C. 213, 227: "The court . . . has a very wide discretion, but it does not sit under a palm tree."

Although fairness is a notion which can be applied to all kinds of activities, its content will depend upon the context in which it is being used. Conduct which is perfectly fair between competing businessmen may not be fair between members of a family. In some sports it may require, at best, observance of the rules, in others ("it's not cricket") it may be unfair in some circumstances to take advantage of them. All is said to be fair in love and war. So the context and background are very important.

In the case of section 459, the background has the following two features. First, a company is an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law.

The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith.

This approach to the concept of unfairness in section 459 runs parallel to that which your Lordships' House, in In re Westbourne Galleries Ltd. [1973] A.C. 360, adopted in giving content to the concept of "just and equitable" as a ground for winding up. After referring to cases on the equitable jurisdiction to require partners to exercise their powers in good faith, Lord Wilberforce said, at p. 379:

"The words ['just and equitable'] are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act [1948] and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The 'just and equitable' provision does not, as the respondents [the company] suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way."

I would apply the same reasoning to the concept of unfairness in section 459. The Law Commission, in its report on Shareholder Remedies (Law Com. No. 246) (1997) (Cm. 3769), para. 4.11, p. 43 expresses some concern that defining the content of the unfairness concept in the way I have suggested might unduly limit its scope and that "conduct which would appear to be deserving of a remedy may be left unremedied. . ." In my view, a balance has to be struck between the breadth of the discretion given to the court and the principle of legal certainty. Petitions under section 459 are often lengthy and expensive. It is highly desirable that lawyers should be able to advise their clients whether or not a petition is likely to succeed. Lord Wilberforce, after the passage which I have quoted, said that it would be impossible "and wholly undesirable" to define the circumstances in which the application of equitable principles might make it unjust, or inequitable (or unfair) for a party to insist on legal rights or to exercise them in particular way. This of course is right. But that does not mean that there are no principles by which those circumstances may be identified. The way in which such equitable principles operate is tolerably well settled and in my view it would be wrong to abandon them in favour of some wholly indefinite notion of fairness.

I should make it clear that the parallel I have drawn between the notion of "just and equitable" as explained by Lord Wilberforce in In re Westbourne Galleries Ltd. and the notion of fairness in section 459 does not mean that conduct will not be unfair unless it would have justified an order to wind up the company. There was such a requirement in section 210 of the Companies Act 1948 but it was not repeated in section 459. As Mummery J. observed in In re A Company (No. 00314 of 1989), Ex parte Estate Acquisition and Development Ltd. [1991] B.C.L.C. 154, 161, the grant of one remedy will not necessarily require proof of conduct which would have justified a different remedy:

"Under sections 459 to 461 the court is not. . . faced with a death sentence decision dependent on establishing just and equitable grounds for such a decision. The court is more in the position of a medical practitioner presented with a patient who is alleged to be suffering from one or more ailments which can be treated by an appropriate remedy applied during the course of the continuing life of the company."

The parallel is not in the conduct which the court will treat as justifying a particular remedy but in the principles upon which it decides that the conduct is unjust, inequitable or unfair.

An example of such equitable principles in action is Blisset v. Daniel (1853) 10 Hare 493 to which Lord Wilberforce referred in In re Westbourne Galleries Ltd. at p. 381. Page-Wood V.-C. held that upon the true construction of the articles, two-thirds of the partners could expel a partner by serving a notice upon him without holding any meeting or giving any reason. But he held that the power must be exercised in good faith. He said that "the literal construction of these articles cannot be enforced" and, after citing from the title "De Societate" in Justinian's Institutes, went on:

"It must be plain that you can neither exercise a power of this description by dissolving the partnership nor do any other act for purposes contrary to the plain general meaning of the deed, which must be this, that the power is inserted, not for the benefit of any particular parties holding two-thirds of the shares but for the benefit of the whole society and partnership . . ."
In the Australian case of In re Wondoflex Textiles Pty. Ltd. [1951] V.L.R. 458, 467, Smith J. also contrasted the literal meaning of the articles with the true intentions of the parties:

"It is also true, I think, that, generally speaking, a petition for winding up, based upon the partnership analogy, cannot succeed if what is complained of is merely a valid exercise of powers conferred in terms by the articles. . . . To hold otherwise would enable a member to be relieved from the consequences of a bargain knowingly entered into by him. . . . But this, I think, is subject to an important qualification. Acts which, in law, are a valid exercise of powers conferred by the articles may nevertheless be entirely outside what can fairly be regarded as having been in the contemplation of the parties when they became members of the company; and in such cases the fact that what has been done is not in excess of power will not necessarily be an answer to a claim for winding up. Indeed, it may be said that one purpose of [the just and equitable provision] is to enable the court to relieve a party from his bargain in such cases."

I cite these references to "the literal construction of the articles" contrasted with good faith and "the plain meaning of the deed" and "what the parties can fairly have had in contemplation" to show that there is more than one theoretical basis upon which a decision like Blisset v. Daniel can be explained. 19th century English law, with its division between law and equity, traditionally took the view that while literal meanings might prevail in a court of law, equity could give effect to what it considered to have been the true intentions of the parties by preventing or restraining the exercise of legal rights. So Smith J. speaks of the exercise of the power being valid "in law" but its exercise not being just and equitable because contrary to the contemplation of the parties. This way of looking at the matter is a product of English legal history which has survived the amalgamation of the courts of law and equity. But another approach, in a different legal culture, might be simply to take a less literal view of "legal" construction and interpret the articles themselves in accordance with what Page-Wood V.-C. called "the plain general meaning of the deed." Or one might, as in Continental systems, achieve the same result by introducing a general requirement of good faith into contractual performance. These are all different ways of doing the same thing. I do not suggest there is any advantage in abandoning the traditional English theory, even though it is derived from arrangements for the administration of justice which were abandoned over a century ago. On the contrary, a new and unfamiliar approach could only cause uncertainty. So I agree with Jonathan Parker J. when he said in In re Astec (B.S.R.) Plc. [1998] 2 B.C.L.C. 556, 588: